Software development contract: when should I get them?

The development of software for clients is seldom a straightforward matter. Whether what is required can be based on pre-existing modules, or whether the client is looking for something entirely bespoke, software is rarely built from scratch. This can lead to particular difficulties in terms of the extent to which the rights in both the new and the underlying software can be passed to the client. For this reason and many others, the terms on which software is supplied and developed must be set out in a comprehensive contract.

Why is it Important?

Given the complexity of many software projects, it is vital to carefully align the scope of work, acceptance testing criteria, milestone payment tranches and sign-off process. As with any long project with multiple unknown factors, the parties are highly likely to experience pain points on their journey together. A strong, watertight agreement anticipating some of these challenges and addressing them in advance helps to keep both supplier and client aligned in their expectations, so collaboration may survive the challenges.

What it is / what should be included?

Generally, software will either be modified, supplied as standard supplier software (in other words, without modification), or it will be specially developed for bespoke use by the customer. Regardless of the nature of the supply of software, some standard issues must be considered and negotiated before finalising any software development contract, including the following:
  • What functionalities is the software required to deliver and which capabilities is it required to support? This should be explained in a detailed specification, including a description of the specific business requirements it is expected to fulfil.
  • How will the software be implemented? Timings may be critical in this respect and a clear plan for each stage of the process should be set out for execution of the project.
  • What’s the price for the software? Sometimes charges will be on a fixed-price basis and at other times the parties will agree on a time-and-materials arrangement. If training for use of the software is included in the price, this should be made clear.
  • What is the acceptance testing procedure? Sometimes this will be outsourced to another business, in which case a separate contract will be required to regulate this. Either way, the extent of the testing and the performance criteria is crucial.
  • When will the software be deemed to be ‘accepted’ by the customer? The customer will want to test the software before it loses its right to reject it and get a refund if it is defective. What constitutes a ‘defect’ should also be defined so that this can be objectively measured.
  • Who will own the newly developed software? This will be the supplier unless the agreement specifies otherwise. If the customer wants to own the rights in what it’s paid for, it may wish for ownership to be transferred. Suppliers should, however, be careful to license rather than transfer these rights if they need to use parts of the program for other customers.
  • Is the supplier expected to maintain or support the software after development? Whether the supplier is required to provide updates or new versions of the software should be included if necessary for business continuity. Often maintenance will be dealt with in a separate contract.
  • Will the supplier have access to sensitive information about the customer’s business? If so (and usually it will), this valuable information should be protected by a confidentiality provision.
  • In what circumstances can the contract be terminated? The consequences of termination will depend on whether the software has been partially or fully developed and should be carefully contemplated.

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